Low interest rates, rising wages and more: five reasons for the market plunge

After three days of volatility and sell-offs in the global equity markets, analysts are still attempting to explain the mood swing. It is inexplicable, on the face of it, that an optimistic US jobs report on Friday would trigger a strong negative reaction. But in her final interview after four years as Fed chair, Janet Yellen noted that stock market valuations were high – even though she could not say if they represented a bubble. But there are also other factors at play:

1 Rising wages

Over the past four years, the US economy has added 10 million jobs, bringing the overall unemployment rate to its lowest level since 2000. Now wages are beginning to rise: more than half of US states have recorded growth of 3% or more. In his State of the Union address last week, Trump said Americans were “finally seeing rising wages” after “years and years” of stagnation. Sensing new inflationary pressure, investors became spooked.

2 Interest rates

Rates have been kept low for two decades, flushing economies with liquidity and causing bubbles to inflate, pop and form again. There’s nothing economists like more than bubble-hunting, and nothing pops bubbles faster that interest rates rises. The Fed has signaled three rate increases this year, and maybe a fourth – posing a continuing risk to the years-long rally in stocks.

3 Government deficit

The yearly US deficit could hit $1tn in 2018, and that’s before Trump’s radical tax-cutting agenda is felt. According to the joint committee on taxation, government revenues will drop by $135bn this year, will be down $280bn in 2019. But spending is set to increase, including billions on disaster aid for California wildfires and Hurricanes Harvey, Irma and Maria. Trump says he is not worried: he believes the repatriation of corporate profits will help correct the imbalance.

4 Profit taking

It is puzzling to analysts that the money coming out of the markets is not necessarily going into government treasuries or other safe havens. That suggests investors are also simply taking out profit after an intense market rally at the beginning of this year. Despite recording its biggest-ever one-day points drop on Monday, the Dow was less than 5% off its record highs in late January. That suggests there is still money on the table. “While the fall in global equity markets looks dramatic, it is no more dramatic than the record rises we have seen since the end of November,” said Jacob Deppe of the online trading platform Infinox.

5 The machines

The excitable traders of previous eras have been largely replaced by computers running complex mathematical algorithms. Just after 3pm on Monday the Dow recorded a 900-point drop in 10 minutes, a pace of sell orders that took the index from 700 down to 1,600 points down. That acceleration looks like the work of automated quant strategies, or possibly a “fat finger” – someone making a mistake.